The Fed Says Lots of Words, Words, Words

Whatever Fed head Janet Yellen's opinion of short-term interest rates is, hers is only one of many. Photo by Chip Somodevilla/Getty Images.

After a relatively quiet summer, the Fed has returned to the forefront, especially after Republican presidential nominee Donald Trump intimated Fed chair Janet Yellen is playing politics with monetary policy. Most of the chatter, though, centers on the Fed’s meeting next week and the $64,000 question: Will they hike or not? We don’t profess to know the answer, but rather than wade through the myriad analyses out there, we present to you the voting members’ latest public comments about a rate hike, and you can try and decipher yourself which way they’ll go. In our view, the varying opinions highlight how difficult—and ultimately, futile—it is to game how a group of people will interpret data and answer one question.

The following responses are listed in chronological order. Comments transcribed from TV interviews may be lightly edited for clarity.

This asymmetry in risk management in today's new normal counsels prudence in the removal of policy accommodation. I believe this approach has served us well in recent months, helping to support continued gains in employment and progress on inflation. I look forward to assessing the evolution of the data in the months ahead for signs of further progress toward our goals, bearing in mind these considerations.

Given how near the U.S. economy is to reaching the Federal Reserve’s dual mandate from Congress (stable prices and maximum sustainable employment), it is reasonable to ask whether the current degree of monetary policy accommodation – historically low interest rates – remains necessary. My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy…

So if we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate. A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.

MM’s Translation: Reasonable people may agree to disagree with me, but I think it makes sense to hike rates slowly.

I wouldn’t take—I wouldn’t foreclose that possibility. You know, and I think it’s important for all of us in going into each meeting, to remain open to the possibility that momentum has changed, that expectations have changed, and thus for us to change our own views.

Well, as you know, with our new framework, it does call for one rate rise, and then it’s very flat after that. We’re a bit agnostic about exactly when that rate rise occurs so… If we had a lot of good news and got into the September meeting, and other people wanted to go, I could support that. But again I’m talking about one increase. There would be no planned increases after that according to the framework that we have.

Question: Ok, so some of the chatter here in Jackson Hole that we’ve heard of a potential two rate increases this year, you think is perhaps…

Yeah, that wouldn’t fit with what we have right now. I suppose things could change, but that’s not what we’re thinking right now.

MM’s Translation: Sure, I could see a case for raising rates. But just one. We all agreed to just one. Though that’s subject to change, so maybe disregard all the other stuff I said.

Question: Can you do one and done or even two and done, or do you have to go to a measured set of rate increases like what we saw a decade ago?

Well, the work of the central banker is never done, and I don’t think you can say one and done and that’s it. We can choose the pace, but we choose the pace on the basis of data that are coming in. So I don’t think we know at the time we start whether it’s one and done or several, it depends entirely on what’s happening in the economy.

MM’s Translation: We are working hard, not hardly working. However, we don’t exactly know the pace of that work.

Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.

MM’s Translation: The data say a rate hike can happen. We have to wait for more data, though.

Question: So if you’re doing 3% (GDP growth), walk me through your rate forecast for the rest of the year.

Given that forecast, consistent with that, I see a gradual upward pace in interest rates as being appropriate. Now that doesn’t mean we’re behind the curve now, but I do think that it makes sense to start moving interest rates up on that gradual path.

Question: In September time, would you like to raise interest rates?

I think every meeting is a live meeting. I go into the meetings with an open mind, I like to hear what my colleagues say, I like hearing diverse views about the economy, and of course we all have our own forecasts and frameworks for doing policy, and I know that’s one of the things we’ll talk about at Jackson Hole.

Question: But it sounds like in that context, you’d certainly like to see an interest rate hike by the end of the year?

Well, timing isn’t the real thing, the real thing is the path… In my appropriate path, it’s a gradual increase. And a deft increase, so it’s not every meeting raising rates. That’s why timing isn’t really like the right way to look at it.

MM’s Translation: Yes, we should raise rates, but it’s about how we do it, not when we do it.

My view is and has been that we should be on a program of gradual rate increases, we can afford to be patient, but that when we see progress toward 2% inflation and a tightening labor market and growth strong enough to support all that, we should take the opportunity to do so, in the absence of some big exogenous event like Brexit or such.

MM’s Translation: While we could wait, as things are right now, we could probably raise rates.

Question: Am I right in thinking in that you’re among the people who believe that the best next move is for the Fed to raise rates sooner rather than later?

Well, you’ve seen in terms of how I’ve expressed my views on the committee, I do think it’s time to move that way. That doesn’t mean I favor high rates, that doesn’t mean I think it has to happen rapidly, I agree that a gradual move in these rates, under conditions where we’re seeing employment move in the direction it is, where we’re seeing low and stable inflation, I think it’s fair to say we could remove some of that accommodation.

Question: Could you see a rate hike in September? You also have meetings in November and December.

Yeah I think it’s possible. I think we have to see how the data falls, and where we are in terms of broad supports for the economy. I think the economy is in OK shape … In that environment, I think we’re getting closer to that day where we’re going to have to snug up interest rates a little bit. And that’s good news. If the Fed gets to the point where we want to raise interest rates again this year, I think that would be good news because it would basically be saying that the Federal Reserve, we’re getting closer to our objectives of maximum sustainable employment and in the context of price stability.

MM’s Translation: Sure, we could raise rates. And if we did, don’t forget, that isn’t a bad thing—that’s a good thing people!

Now, these quotes are from Fed members with a vote on policy this year. There are other regional Federal Reserve Bank Presidents who aren’t on the FOMC but still attend meetings and report to the group, and their perspectives vary. For example, Minneapolis Fed President Neel Kashkari seems to favor waiting while San Francisco Fed President John Williams has called for a hike sooner rather than later. These additional viewpoints add to the broader discussion—and noise—but also get priced in by the market. However, whether you find Fed-speak interesting or not, we believe the hullabaloo over a potential rate hike is much ado about nothing. Whether it happens in September, November, December or even next year, another rate hike isn’t likely to derail the underappreciated, expanding US economy or end the current bull market.

[i]Bloomberg’s Matt Levine had a delightful little blurb in his link wrap on Tuesday. See it here, under “Interest Rates.”

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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